Participating Mortgages and the Efficiency of Financial Intermediation

Ebrahim, Muhammed Shahid; Shackleton, Mark B.; Wojakowski, Rafal M.

doi:10.2139/ssrn.1101524

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Participating Mortgages and the Efficiency of Financial Intermediation

33 Pages Posted: 6 Mar 2008

See all articles by Muhammed Shahid Ebrahim

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Rafal M. Wojakowski

Lancaster University - Management School; University of Surrey

There are 5 versions of this paper

Date Written: March 3, 2008

Abstract

This paper distinguishes Participating Mortgages (PMs) from Convertible Mortgages. We study variants of PMs to demonstrate that they have the potential of improving the efficiency of a financial system. We resort to closed-form formulae to price profit caps and floors identified in variants of PMs. Our contribution includes finite maturity pricing formulae, which are scarce in real estate finance as most contracts are of definite tenure. We also focus on random tenure mortgages, which occur in the context of default and pre-payment risk. Finally, we conclude our study with a public policy implication of employing PMs as workout loans especially in the ongoing sub-prime crisis.

Keywords: Participating Mortgage (PM), Shared Appreciation,Mortgage (SAM), Shared Income Mortgage (SIM), Shared Equity Mortgage (SEM), Profit Caps and Floors

JEL Classification: C63, D11, D14, D92, G13, G21, R31

Suggested Citation: Suggested Citation

Ebrahim, Muhammed Shahid and Shackleton, Mark B. and Wojakowski, Rafal M. and Wojakowski, Rafal M., Participating Mortgages and the Efficiency of Financial Intermediation (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=1101524 or http://dx.doi.org/10.2139/ssrn.1101524